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Wednesday, January 16, 2008

LONDON (Thomson Financial) - The dollar regained some composure after recent heavy losses, amid speculation of aggressive US rate cuts, while the yen continued to soar, buoyed by negative market sentiment.

"Unlike in Monday when the dollar fell across the board due to the possibility of an inter-meeting rate cut of 50 basis points this week, the current currency dynamics see the dollar rally against most currencies while continuing its damage against the yen," said Ashraf Laidi at CMC Markets.

Market speculation that the Federal Reserve could cut US interest rates by as much as 75 basis points this month -- including the possibility of a move ahead of its scheduled Jan 29/30 meeting -- had caused a dollar rout, but the US currency is now recovering somewhat thanks to negative sentiment.

TICS investment flow data today, for example, may well show US investors bringing their money back home as the global economic outlook worsens -- a trend that would strengthen the dollar.

"Signs that the recent volatility in global asset markets is triggering repatriation will underline the potential for the dollar to rebound against the high yielders and commodity currencies," said BNP Paribas analysts.

Also out today are US consumer inflation and industrial production figures, both of which will offer further insight into the likelihood of Fed cuts.

Meanwhile, the yen continued its surge thanks to risk aversion that is hitting high yielders and commodity currencies, striking new two-and-a-half-year highs against the dollar but also making headway across the board.

The Swiss franc also strengthened. Like the yen, the franc has suffered for years under carry trades, a risky one-way currency bet that depends on bullish market sentiment.

"Low yielders have been the star performers, with both the yen and Swiss franc making broad based gains," said BNP Paribas analysts.